The SBI said it would be cutting interest rate on deposits in saving banks which were less than Rs 1 lakh by 25 basis points.
It was a strong comeback by the Bulls, with the financial sector – especially the banks – allowing them to once again make an attempt to take control of Dalal Street in Wednesday’s trading session. While the early trade was not very encouraging, with NSE’s Nifty moving between red and green territories, it was the State Bank of India (SBI)’s announcement that made all the difference.
The SBI said it would be cutting interest rate on deposits in saving banks which were less than Rs 1 lakh by 25 basis points. The SBI also announced a cut in rate ranging between 10 and 30 basis points. That was the cue that stocks seem to have been waiting for. The SBI stock rose, taking most of the bank shares with it, closing at Rs 260.95, a rise of 4.76 per cent. The leading bank also announced a cut of 10 basis points in its lending rate. What SBI does is followed, largely, by other banks.
The Bank Nifty index, which was trading marginally in the green territory, witnessed a sharp upward movement after SBI’s announcement, which continued till the end of the trading session. The index ended the day with a gain of 1,018 point or 3.67 per cent at 28,785. The broader Nifty index ended the trade at 11,313.30 with gain of 186.90 points or 1.68 per cent. BSE’s Sensex gained 1.72 percent or 645.97 points to end the trade at 38,177.
In the last few weeks, especially after the RBI announced its repo rate cut, the Street has been apprehensive that the banks may not cut their interest rates on saving accounts, given the sensitive nature of the move, while being forced to cut lending rates for floating-rate loans. This would have brought pressure on the net interest margins of banks leading to a decline in profitability.
But with India’s largest public sector bank cutting its saving rate sharply, it became clear that banks, would not shying from chopping savings interest rates to save their margins. Further, the system is awash with liquidity. That means that if there is enough money around, banks are likely to become more aggressive in pushing credit into system, both at the retail and the wholesale levels.
A part of this push would come by way of buying loan books of some of NBFCs which would unclog their systems and holdings, which, according to market observers, is required at the moment. Some part of the rise, of course, was attributed to short covering. But the fate of Wednesday’s upward move would depend on whether the delivery numbers for the trades are higher and whether there would be follow-up of buying on Thursday, which also happens to be the day of expiry of weekly contracts.
(Shilpa Nagpal is an analyst at Market Wizards Securities Pvt Ltd)